Picture: bringing in hay bales. Sovereignty believes the future for Britain is to be found in more small-scale farms.

We all know that agriculture is in crisis. Foot and Mouth precipitated an immediate crisis, but long before that, UK agriculture was in serious trouble. It is the common assumption that the problem is the CAP.

Even Tony Blair, when he is not blaming supermarkets has joined that condemnation, and last year in a speech to the World Wild Life Fund for Nature he declared that the policy was "bad for consumers, bad for the environment and ultimately bad for farmers".

However, we've still got it! That in itself should teach us something. Tony Blair is simply the latest in a long line of commentators who have condemned it.

Nobody could improve on the last government's view of the CAP, delivered during the Conservative administration and expressed in a memorandum by MAFF to the House of Lords European Communities Committee in 1995. It said thus: "The huge cost of the policy to taxpayers and consumers far outweighs any benefit to them -- such large transfers into agriculture represents a major misallocation of resources and thus damage the economy as a whole -- the policy is extremely complex in detail, hence difficult and costly to administer and giving scope for fraud."

Yet, despite reforms, spending on the CAP has continued upwards, and British farming has deteriorated to crisis point.

The core of the CAP is subsidies. It is easy to attack subsidies, but it is very hard to make a case that subsidies are necessarily wrong. It is not, therefore, necessarily the case that the CAP is wrong in principle because it gives subsidies to farming.

It may well be that it is the wrong type of subsidies, paid in the wrong way, to the wrong people. For instance, 5% of British farmers get 80% of the subsidies. But there are powerful arguments for farmers receiving subsidies. The simple fact is that in the USA and in almost all countries in the developed world - with the exception of Australia and New Zealand - agriculture is subsidised.

And of course, when you come home and look at the EU 15, including the UK, all these countries are subsidised because we are under a Common Agricultural Policy.

ONLY BRITISH FARMING IS IN CRISIS
What is vital to appreciate is that, of the EU 15, it is only UK agriculture which is at crisis point. That crisis point is measured in terms of net income.

In a 5-year period 1995-2000, agricultural incomes in the EU increased, using '95 as a base of 100, to 114. That is a 14% increase. Some countries, such as Finland and Ireland, increased beyond this, however, the UK dropped 42%. The average farming income in the UK is now £4,500 a year. Now that, ladies and gentlemen, is a crisis!

Why, if we have a Common Agricultural Policy which applies to all 15 countries which all receive subsidies, should British agriculture be the only one in crisis?

Continental agriculture - while not doing very well - is nevertheless doing not badly. If you drive around northern Germany, southern Germany, eastern France, Belgium, you see a picture of contentment and prosperity. New tractors, well kept buildings, neat farms, modern equipment in the farms, and brand new cars out front. Here in Britain there is, in some places, abject poverty. Why?

Now clearly logic would dictate that if you had a Common Agricultural Policy and only one country out of 15 was suffering then the problem might not be rooted strictly or solely in the Common Agricultural Policy. And that, as a working thesis, is something to consider very seriously and very hard.

FOREIGN PRODUCERS UNDERCUT HOME MARKETS
Some commentators point at supermarkets. Mr Blair did so. I believe that gets him off the hook! Some say, "If only supermarkets would pay us realistic prices for our products then everything in the garden would be rosy". It is true that the UK has the best developed supermarket system in the EU, if not the world, and it is true that the supermarkets hold a great deal of power.

However, at the sharp end, you can see how the mechanism works. Take eggs. You have 6 major packers in the UK. The supermarket tells them the price. Say, 43p a half-dozen. You, the producer, go along to the supermarket and say "We can't live on 43p." They say, "Fine, we are not paying you any more."

"Well", you say, "we will withdraw our trade." "No problem" say the supermarkets, "sitting in the next room we have a Dutch supplier who can undercut you."

That applies across the board to most commodities. Our EU neighbours can undercut the market and still make money and still turn out an overall increase in income over a 5-year period. Why?

The problem is that there is a policy within a policy. It is easy and superficial to blame supermarkets, and the CAP and the EU, and the wicked bureaucrats sitting in Brussels engineering the downfall of British farming, but nothing is that straightforward.

Basically, you have to consider two parallel points: The first, is subsidy levels, and second is international trading conditions.

HIGHER LEVELS OF SUBSIDY IN THE REST OF THE EU
Take the supermarkets. If they can buy cheaper from abroad on commodity products, it will be the EU import price which sets the market price.

If our EU competitors get more money outwith their product sales, that is, if they have an extra stream of income over and above that of British farmers, and if they have free access to our markets - without tariffs or quotas - then they will undercut the markets, and that is precisely what is happening.

Although it is a Common Agricultural Policy it is not a common subsidy base.

If EU competitors are paid higher levels of state subsidy than our own industry, and have free access to our markets then they will have a lower cost base and they will be able to offer lower prices, while maintaining their own profitability.

For British farmers to compete in this environment, they must match those lower costs and if their cost base is higher, they can either reduce overheads by increasing 'efficiency' or reduce their incomes, or both, or go out of business.

HOW THE CAP SUBSIDY SYSTEM WORKS
There are 3 levels of subsidy. The broad fund which pays the money is called the European Agricultural Guarantee and Guidance Fund, or EAGGF.

It is split into two areas: Most of the money goes into, firstly, "non discretionary funds" which are direct support payments to farmers. If farmers comply with the EU rules, they receive the funding directly from their government, which reclaims the full amount from the EAGGF.

Secondly, included also in the EAGGF are the "discretionary funds", which are rural and environmental payments and other schemes, where it is up to the "discretion" of the central government of each member state to decide how much to take out of the fund. Crucially, discretionary funding has to be co-funded by an equivalent amount from the member state.

Thirdly, there are the funds specifically for non-euro members, which ceased at the end of last year. This is the agri-money intended to level out fluctuations in the non-euro currencies in relation to the euro

However, non-discretionary funding comprises the main tranche of agricultural subsidies.

You would think that if it were a Common Agricultural Policy then all farmers would get the same funding throughout the EU. Not so. Even in this non-discretionary area of expenditure, there are disparities which are difficult to reconcile. Britain appears to do well.

It produces 8.4 % of the EU's agricultural goods yet claims 10.1% of the EAGGF budget (1995-1998).

However, Ireland, our major EU competitor in beef and milk products does much better. Accounting for only 2.1% of total EU production - but 6.9% of the beef, exactly the same as the UK - it draws down 4.5% of the budget. This is effectively 70%, pro rata, more than Britain. If each country's EAGGF receipts were exactly linked to their percentage of EU agricultural production, Ireland's drawings in 1998 would have been 0.8 billion ecu -- approx £0.56 billion -- instead of the 1.7 billion ecu it actually received. To maintain financial equivalency, the UK should have drawn down 6.3 billion ecu, rather than the 4.4 billion ecu it actually received -- around another £1.3 billion or so.

UK GOVERNMENT NOT SUPPORTING ITS FARMERS
Disparities are being and will be magnified considerably as a result of CAP reforms agreed in 1999, as part of "Agenda 2000". Their basis was that producer aid and market support should be reduced and more funds should be channelled into discretionary schemes such as rural development, intended to support farm modernisation projects, assist young farmers, and compensate less favoured areas.

Unlike the non-discretionary producer aid and marketing support, these schemes require "matched funding" with member states making direct contributions. Member states can decide, within limits, how much money they allocate.

The current rural development programme covers the seven years of 2000-2006, for which member states have already made commitments. Significantly, the Irish -- with a population of under 4 million -- have set up schemes costing an average of £500 million per year. The Irish government's contribution is 55 percent, the balance being made up by the EU. Germany has committed to £1.1 billion a year, taking up 16 percent of the Community's rural development budget, while France leads the field with £1.2 billion a year, calling on 17.5 percent of the budget.

The UK government, however, has a record of parsimony when it comes to matched funding schemes. This is indicated by its uptake of the scheme for encouraging young farmers, by way of cheap loans and development funding. While the French gave assistance to 11,952 young farmers between 1990-1997, the Spanish 6,005 and Portugal 2,365 -- between them spending 249 million ecu -- the British assisted a mere 27, with a paltry 152,000 ecu.

Predictably, Britain has remained reluctant to commit serious money to rural development in the current expenditure round.

Thus, with a population similar to that of France, it has only drawn down a mere 3.5 percent of the budget and has allocated the paltry sum of £230 million a year. This is a fifth of that devoted by the French to their schemes and less than half that allocated by the Irish government whose farming industry produces a quarter of British output.

Crucially, as Ireland is our main competitor in the livestock field of beef and milk products, then it is with Ireland that equivalency is important.

To maintain competitiveness, the UK would have to match the Irish commitment. On a population adjusted basis, from a population of nearly 60 million, against less than four million in Ireland, that would bring the British rural development fund commitment to £7.5 billion a year [factor of 15 x Ireland's £500m].

Perhaps a more realistic basis is that we have 4 times the agriculture output, and so if you give it a 4 times multiplier in relation to Ireland we would be paying £2 billion a year [4 x Ireland's £500m] into the rural development fund instead of £230 million.

AGRIMONEY COMPENSATION NOT COLLECTED
There is a third element which leads to us being under-funded in relation to our EU competitors. We pay money into the EAGGF kitty in sterling. However, the subsidies are calculated in euros and so when the euro depreciates against the pound, the subsidies are paid to British farmers in the devalued euro currency, and the farmers get less money.

To compensate farmers for the reduced value, a top-up scheme exists called "agri-money", to which the UK has to contribute. But this is a discretionary fund and it must be match-funded by the UK. For every 50p paid out, the British government must find the equivalent. As a result, this government, and the Tories before it, refused to find anything like the amount of agri-money that was due.

In the four years 1997-2000, the NFU estimates that British farmers have been short-changed by £1.2 billion or £300 million a year, which is more than the annual £230 million amount allocated to the rural development fund. A deficit of £1.2 billion since 1997, is very substantial in an industry which only turns over £13 billion a year.

SO HERE IS THE REAL PICTURE
In relation to our EU competitors, there is chronic under-funding of British agriculture within the CAP, namely a) producer aid disparity, for example, with Ireland, b) miserly rural development funds and c) the "agrimoney" deficit. But even this is not the full picture.

Under the EU's single market regime, British farmers have to compete with unrestricted imports from member states such as Ireland, whose farmers benefit from higher levels of state funding. Despite calls from British farmers to reduce imports from our EU partners, the government cannot respond. It would be illegal under EU rules.

In addition, outwith the CAP there are national support systems. Just because there are CAP payments does not stop national governments paying money in addition. There are hundreds of such schemes. For example, if you are a German farmer you pay income tax, but only on 75% of your income. Very few Germans and Austrian farmers actually pay any tax at all. In Holland where there is a high proportion of tenant farmers -- around 60% -- there is a rent cap maintained at an artificially low level on all agricultural land.

I dug out an EU report which listed all the national support systems, and went into page after page. When it came to the UK, it was the shortest entry of them all and it said "None".

Where does that put us? Yes, the CAP is a problem, but the real problem is in the way the UK administers it, and is able to blame "supermarkets," "CAP", "Brussels", indeed blame anybody else except itself for the collapse in the industry.

The real problem, within the context of the immediate crisis in British farming, is not Brussels, it is Whitehall.

THE BUCK STOPS NOWHERE
Where the EU comes in, is in the broad context. Because we have this other level of government, because it is so complex, and because we have shared responsibility, nobody knows who is in charge.

When you knock on the door of the EU Commission, they say "Nothing to do with me, gov, go and see your own Government." When you knock on the door of Whitehall, they say "Nothing to do with me, gov, go and see Brussels," and the buck goes round and round and round.

Remember Roosevelt, "The buck stops here". The moment you develop systems of government where no single entity is in charge and is responsible, then there is no single line of accountability, and there is no democratic control.

You end up with things like the CAP, which cause disaster, and nobody knows exactly how and why. The whole accumulated weight of experience and intelligence is unable to do anything about it.

So we see the whole thing sliding into the abyss and we say "Wouldn't it be nice if -- " and next year it is all just the same.

So, the problem in a nutshell is that British agriculture is hugely under-funded in relation to our EU competitors to around the tune of £3.5 billion a year; the single market gives free access to our EU competitors; and these competitors are able to undermine our own farmers because they are better supported, both with CAP funds drawn down by their governments, and by national support systems.

In addition to this un-level playing field, we have a system of government which no longer works, is no longer accountable, cannot support our core basic industries, and is so complex that nobody understands it, the people have lost trust in it, and our politicians get away with it.